Lou’s preferences over pizza (x) and other goods (y) are given by U(x, y) = 2xy2. His income is $200. a) Calculate his optimal basket when Px =4 and Py = 1. b) Calculate his income and substitution effects of a decrease in the price of food to $2. c) Calculate the compensating variation of the price change. d) Calculate the equivalent variation of the price change.

Question

Lou’s preferences over pizza (x) and other goods (y) are given by U(x, y) = 2xy2. His income is $200.

a) Calculate his optimal basket when Px =4 and Py = 1.

b) Calculate his income and substitution effects of a decrease in the price of food to $2.

c) Calculate the compensating variation of the price change.

d) Calculate the equivalent variation of the price change.

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